Federal regulators vowed to seek an immediate stay of the ruling by U.S. District Judge Joe Kendall in Wichita Falls, Texas. The Department of Justice and the Federal Communications Commission said they will also appeal the order to a higher court. Long distance companies also said they would appeal.

"This decision is unequivocally bad for the consumers of America," said FCC Chairman William Kennard at a Washington news conference Friday.

"Too many times, companies would rather litigate than compete," Kennard said.

The ruling, if upheld, would allow the Baby Bells -- Ameritech
AIT, +0.34%
, Bell Atlantic
BEL, -1.20%
, Bell South
BLS, -8.33%
, SBC Communications
SBC, -0.76%
and US West
usw
-- to offer long-distance services in their own regions without proving they have opened their local networks up to competition by other firms.

The Bells would be the only companies able to offer one-stop shopping for all telecommunciations services, a valuable advantage in today's confusing marketplace.

The ruling's big losers are long distance companies like AT&T, MCI
MCIC, -0.22%
and Sprint
FON, +0.00%
and competitive local phone companies like WorldCom
wcom
and Teleport Communications.
wcom
The major non-Bell local company, GTE
GTE, +0.76%
, which already can compete in both markets, loses its comparative advantage over the other companies.

The ruling is only the latest setback to the Telecom Act. Earlier, the Eighth Circuit Court of Appeals overturned the Federal Communications Commission's key regulations for opening up the local phone market. Another part of the act banning indecent material on the Internet was overturned by the Supreme Court.

Competition has also eluded the cable television industry, another goal of the 1996 act.

Wednesday's ruling unravels the key compromise of the 1996 bill. Kendall said the law unconstitutionally singles out the five companies and holds them guilty of anti-competitive behavior without a trial.

The FCC's Kennard said Kendall's finding "is just flat wrong." He said the law actually "liberated" the Baby Bells from even more restrictive limits imposed by the federal courts.

The Baby Bells continue to dominate the local phone business in their regions nearly two years after passage of the law. The Baby Bells were created by the 1984 court order that broke up the old AT&T system and brought competition to the long-distance market.

In exchange for a legal monopoly in the local market, the Bells were prohibited by the court from offering long distance service and were banned from several other businesses, such as alarm services, electronic publishing and telephone manufacturing.

The 1996 act was designed to open up local phone service to competition by offering the Baby Bells a carrot -- entry into the $80 billion a year long-distance business.

But the Federal Communications Commission has yet to certify that any of the five companies has met the test of competition. The FCC's denial of a long-distance license to SBC Communications in Oklahoma sparked the lawsuit that led to Kendall's ruling. US West joined SBC's suit. Applications by Ameritech and Bell South have also been rejected by the FCC.

The ruling does not immediately allow SBC or US West to offer long distance in their own regions, according to Chris Wright, FCC general counsel. And once the order is actually issued, it will apply only to those two companies, Wright said.

The FCC still has many weapons in its arsenal to push for local phone competition, including authority to grant tariffs. "We will use every tool in our jurisdiction to open up these markets," Kennard promised.

Rep. Edward Markey, D-Mass, said the ruling "is a travesty." Markey, one of the chief sponsors of the 1996 law, said the Justice Department should investigate the Baby Bells for anti-competitive behavior.

Predictably, positive reactions to the ruling came only from the Baby Bells.

SBC Chairman and CEO Edward E. Whitacre Jr. said the company planned to offer long-distance service in Oklahoma as soon as the necessary tariffs were filed and approved. SBC operates under the Southwestern Bell, Pacific Bell and Nevada Bell brands in its seven-state territory of Arkansas, Kansas, Missouri, Oklahoma, Texas, California and Nevada.

The decision ``is good news for consumers,'' Bell Atlantic said in a statement. ``It gives consumers new choices for long distance providers, and will speed the pace of competition in local markets as AT&T, MCI and Sprint now have added incentives to provide local service. Other reactions were negative.

Gene Kimmelman, of the public advocacy group Consumers Union, said the Texas ruling is especially harsh for customers who already have seen rate increases for cable bills, pay phones and charges for a second phone line. ``The law is not working and this court case adds further doubt over whether we will ever see competition'' in telecommunications, he said.

Jonathan Sallet, chief policy counsel for MCI, said, ``We will be in court very quickly to seek a stay of this order. If the stay goes into effect, there should not be an immediate impact for consumers. If it would go into effect, consumers would immediately see anti-competitive actions by the Bells.''

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